Asymmetric pass-through and competition

We study the retail price pass-through of four major tax changes in petroleum products using daily pricing data from gas stations on small Greek islands. We find that (i) the pass-through of the tax hikes is five times higher than for the tax decrease, (ii) the pass-through of the tax hikes increases with competition, while that of the tax decrease does not, (iii) there is significant asymmetry in the speed of price adjustments, and,(iv) the asymmetric price adjustment cannot be explained by tacit collusion, instead the evidence suggests that search is the most plausible explanation. We dedicate this paper to the loving memory of Mario Pagliero, a brilliant economist and a dear friend, who passed away too soon.